Rating Action: Moody's affirms Core & Main's CFR; downgrades term loan rating to B1Global Credit Research - 18 Aug 2022New York, August 18, 2022 -- Moody's Investors Service ("Moody's") affirmed Core & Main LP's (Core & Main) Ba3 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating (PDR). Moody's downgraded the senior secured first lien term loan rating of Core & Main to B1 from Ba3. The company's speculative grade liquidity rating is unchanged at SGL-1. The rating outlook is stable."The downgrade of the term loan reflects weakened recovery for that class of debt, which now comprises a lower share of the overall capital structure following an upsize of the ABL revolver (unrated) to $1.25 billion," said Griselda Bisono, Moody's Vice President Senior Analyst. "The B1 rating of the company's $1.5 billion term loan is one notch below the CFR, despite the term loan's first lien on substantially all assets not pledged to the revolver, because the ABL has a first lien priority on the relatively more liquid ABL collateral, including accounts receivable, inventory, deposit accounts and cash, resulting in the subordination of the term loan creditors," added Bisono.The affirmation of the CFR reflects Moody's expectations of continued strong credit metrics through fiscal 2023, including debt / EBITDA trending to 2.1x.The stable outlook reflects Moody's expectations that Core & Main will continue to grow both organically as well as through tack-on acquisitions while maintaining solid operating margins above 7.5%. The stable outlook also reflects maintenance of very good liquidity.Affirmations:..Issuer: Core & Main LP.... Corporate Family Rating, Affirmed Ba3.... Probability of Default Rating, Affirmed Ba3-PDDowngrades:..Issuer: Core & Main LP ....Senior Secured Bank Credit Facility, Downgraded to B1 (LGD4) from Ba3 (LGD4) Outlook Actions: ..Issuer: Core & Main LP ....Outlook, Remains Stable RATINGS RATIONALE The Ba3 CFR reflects Core & Main's position as one of the top water products distributors in the US with a diversified product offering, large customer base and strong end market fundamentals. Moody's expects solid revenue growth over the next two years as the municipal end market and, to a lesser extent, the non-residential end market benefit from the recently passed Infrastructure Investment and Jobs Act, which will provide long-term federal financing for infrastructure projects in the US. The residential end market will experience slower growth over the next two years after stronger than normal performance following COVID pandemic lockdowns. Moody's expects operating margins will remain strong between 9-10%, bolstered by the company's private label offerings, better pricing initiatives and driving SG&A productivity. These factors are counterbalanced by the cyclical nature of Core & Main's end markets as well as the company's exposure to commodity pricing, specifically those used to produce PVC pipe and ductile iron pipe products, which can create cash flow volatility. Furthermore, the rating is constrained due to ownership concentration by private equity firm CD&R, which controls about 70% of the total voting power. Concentrated decision making creates the potential for event risk and decisions that favor shareholders over creditors.Core & Main's SGL-1 rating reflects Moody's expectation of very good liquidity over the next 12 to 18 months and considers strong positive free cash flow between $400-500 million annually in both fiscal 2022 and fiscal 2023. Liquidity is supported by a $1.25 million ABL facility due 2026 that is expected to remain largely available.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA ratings upgrade would require improved governance through the reduction in CD&R's ownership and influence over Core & Main. In addition, upward ratings movement would reflect debt-to-EBITDA below 3.0x and RCF-to-debt closer to 18% while maintaining of very good liquidity.A ratings downgrade could result should the company experience a meaningful deterioration in credit metrics, including debt-to-EBITDA sustained above 4.0x, a significant contraction in EBITDA margin and low or negative free cash flow. The engagement in debt-funded acquisitions or shareholder distributions could also lead to a ratings downgrade.The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://ratings.moodys.com/api/rmc-documents/55403. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Core & Main LP, headquartered in Saint Louis, Missouri, is a US based distributor of water, sewage, drainage, storm water, and fire protection products. Revenue for the twelve month period ended May 1, 2022 was $5.5 billion.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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